Private Company Tender Offer: How Pre-IPO Companies Run Employee Liquidity Programs
A private company tender offer is an employer-orchestrated buyback of employee and early-investor shares at a fixed price, typically syndicated to outside investors who take the shares onto their own books. Stripe ran one at a reported $91 billion valuation in February 2024 and again at $159 billion in February 2026, Databricks ran one at $62 billion in April 2025, and SpaceX has run them roughly every six months for the last four years, moving from $180 billion to a reported $350 billion mark. If you are an employee weighing whether to sell into one, a founder weighing whether to run one, or an investor weighing whether to anchor one, this guide walks through the SEC framework (Reg 14E without 14D), the Wellman v Dickinson 8-factor test that makes a buyback a “tender offer” in the first place, the cap-table mechanics, the 409A interplay, the tax treatment for Incentive Stock Option (ISO) and Non-Qualified Stock Option (NSO) and Restricted Stock Unit (RSU) holders, and a decision framework grounded in 2024-2026 deal precedent.
The structure is not the same as a public-company tender offer (which triggers Regulation 14D and a Schedule TO filing), and it is not the same as selling on a secondary marketplace like Forge Global or EquityZen. The legal scaffolding, the eligibility logic, the pricing math, and the tax outcomes all diverge in ways that matter for both sides of the trade.
Quick-reference comparison: private tender vs public tender vs secondary marketplace vs direct sale
Four common liquidity paths exist for a holder of privately-issued stock. The table below summarizes the legal regime, who organizes the trade, pricing dynamics, and typical use cases. Use it as the orientation map before you dive into the mechanics sections.
| Feature | Private-co tender | Public-co tender | Secondary marketplace | Direct secondary sale |
|---|---|---|---|---|
| Securities regulation | Reg 14E only (no 14D) | Reg 14D + 14E (Schedule TO) | Rule 144 / 4(a)(7) / Reg D | 4(a)(1-1/2) practice |
| Who runs the trade | Issuer + lead investor | Bidder (often hostile) | Forge, Hiive, EquityZen, Nasdaq Private Market | Buyer-seller negotiated direct |
| Price discovery | Single negotiated clearing price | Public bid premium to market | Order-book auction or RFQ | One-off negotiated |
| Eligible sellers | Issuer-defined (employees, early VCs) | All public holders | Any holder past lockup | Holder-by-holder |
| Issuer consent | Required (issuer runs it) | Not required (open market) | Required (ROFR + transfer-approval) | Required (ROFR + transfer-approval) |
| Disclosure regime | Offer to Purchase document, 14E anti-fraud | Schedule TO, Schedule 14D-9 | Forge/Hiive provided data room | Bilateral NDA + due diligence |
| Typical window | 20 business days (best practice) | 20 business days (Rule 14e-1) | Continuous | Days to months |
| Typical use | Employee retention + founder liquidity at a unicorn | M&A acquisition or buyback | One-off employee liquidity, no issuer program | VC fund secondary, founder block |
The rest of this guide focuses on column one. Sections 4 and 5 cover the regulatory framework, sections 6 through 9 cover the mechanics, sections 10 and 11 walk through recent deals and tax treatment, and sections 12 and 13 cover the employee and founder decision frameworks.
Why pre-IPO companies run tender offers
Five forces push a private-company board toward sponsoring a tender. Each has gotten more acute as the median time from Series A to IPO has stretched from roughly 6.9 years in 2014 to 10.7 years for 2024 IPO cohort companies, per PitchBook-NVCA Venture Monitor data.
1. Employee retention and golden-handcuffs relief. Cliff vesting plus a long IPO horizon means an engineer who joined in 2018 may have fully vested shares with zero liquidity by 2026. Carta’s State of Private Markets reports show that employees at unicorns now hold paper wealth that is, in many cases, the largest asset on their personal balance sheet, but cannot convert it. A tender that lets a vested employee sell 20% of holdings is a powerful retention tool because it converts paper wealth to real wealth without forcing departure.
2. Founder and early-investor liquidity. Founders who took below-market salaries for a decade and Series A investors whose fund vintage is approaching wind-down both need partial monetization. A board-sponsored tender lets the founder sell, say, 5% to 10% of holdings without a separate secondary process and without the optics of an unsanctioned sale on a marketplace.
3. Valuation marker for the next primary round. A tender prices common stock and, by reference, the preferred stack. When Stripe’s February 2024 tender priced common at the implied $65 billion valuation, then $91.5 billion later that month, every Series H term sheet in the market repriced off that anchor. The tender produces a clearing price that auditors will respect for the next 12 months of 409A work.
4. Board pressure relief on IPO timing. A late-stage board hears constant pressure from employees and growth-fund LPs to take the company public. A tender de-pressures that conversation by giving holders a release valve. JPMorgan Workplace Solutions notes that tender programs frequently push IPO timing out by 18 to 36 months.
5. Cap-table cleanup and consolidation. Smaller early-employee positions get rolled into a single secondary buyer’s line, reducing the cap-table line count. Cooley GO’s primer on private tenders highlights that this matters at IPO when the underwriter’s Selling Stockholders Schedule must be assembled.
The Hiive marketplace data tracks roughly 1,400 active private-market issuers as of mid-2026, of which an estimated 110 ran a board-sponsored tender in the prior 12 months. The volume has roughly tripled since 2021.
6. Defensive posture against unsanctioned secondaries. If the board does not provide a sanctioned liquidity path, employees and early holders will seek one anyway through Hiive, Forge, EquityZen, or Nasdaq Private Market. Unsanctioned trades create ROFR-waiver friction, transfer-approval headaches, and cap-table fragmentation. A tender is the board-friendly answer: it gives a one-time controlled release valve, the board chooses the buyer-side syndicate, and the issuer keeps governance discipline intact. Per CB Insights private-market research, the unsanctioned-secondary volume on Hiive and Forge combined has roughly doubled in each of the past three years, which has pushed even reluctant boards to consider a programmatic tender as a defensive move.
The SEC regulatory framework for private tenders
A common misconception is that any tender offer triggers Schedule TO filing under Regulation 14D. It does not. Schedule TO and 14D apply only to a class of securities registered under Section 12 of the Securities Exchange Act of 1934, meaning publicly-traded equity. A pre-IPO private company has no Section 12 class, so Reg 14D is inapplicable. The applicable rules are:
Regulation 14E (universal anti-fraud). Promulgated under Section 14(e) of the Exchange Act, Reg 14E applies to any tender offer, whether for a public or private class. The operative text is 17 CFR 240.14e-1 through 240.14e-8.
Rule 14e-1 commencement and timing. A tender offer must be held open for at least 20 business days from commencement. Any material change to the terms (price, percentage sought, dealer’s soliciting fee) extends the window by at least 10 business days. See 17 CFR 240.14e-1. The 20-business-day window is widely treated as mandatory for private tenders too, even though strictly Rule 14e-1 is silent on whether it reaches private offers (the better view, adopted by most BigLaw memos including Cooley and Wilson Sonsini, is that the practical anti-fraud lens makes 14e-1 compliance the safe-harbor practice).
Rule 14e-2 target’s position statement. Under 17 CFR 240.14e-2, the “subject company” (the issuer in a private tender) must publish a position statement within 10 business days of commencement, recommending acceptance, rejection, neutrality, or unable-to-take-position. In a private tender where the issuer is also organizing the offer, this folds into the Offer to Purchase itself.
Rule 14e-3 insider trading. 17 CFR 240.14e-3 prohibits anyone with material non-public information about a pending tender offer from trading on it. This bites hardest on the buyer-side syndicate. Once a substantial step toward commencement has been taken, syndicate members and issuer insiders cannot trade in any related security.
Rule 14e-5 prohibition on purchases outside the tender. See 17 CFR 240.14e-5. Once a tender is announced, the bidder cannot purchase the same class of stock outside the tender until expiration. For a private tender, this means the syndicate cannot also be picking up shares on Hiive or Forge during the window.
Securities Act registration. The buyer-side acquisition of the shares is itself a sale of securities (because the shares change hands from holder to acquirer). The acquirers rely on a registration exemption, typically Section 4(a)(2) of the Securities Act, Regulation D Rule 506(b) or 506(c), or the Section 4(a)(7) accredited-investor exemption codified by the FAST Act in 2015. Each requires accredited-investor verification on the buyer side and resale-restriction legending on the certificates.
State blue-sky compliance. Form D federal-covered filings preempt most state registration, but state notice filings and fees still apply in approximately 35 states for Rule 506(b) offerings.
Rule 13e-3 going-private considerations. If the tender is structured as a step in a going-private transaction, 17 CFR 240.13e-3 can apply, but only for issuers with a Section 12 class. For pure pre-IPO private tenders, Rule 13e-3 is inapplicable. 17 CFR 240.13e-4 issuer tender offers likewise applies only to Section 12 registrants.
Section 3(a)(11) intrastate exemption. Rarely useful here. The exemption requires the issuer, buyers, and offerees all to be in the same state, which fails immediately for a multi-state employee base.
Investment Company Act and Investment Advisers Act considerations. The buyer-side syndicate vehicles (special-purpose vehicles, continuation funds, secondary funds) must each clear Investment Company Act Section 3(c)(1) (under 100 holders) or 3(c)(7) (qualified-purchaser-only) status, and the sponsor must be a registered investment adviser or exempt reporting adviser under the Advisers Act. For the issuer side, this is a buyer-side workstream and rarely impedes deal timing, but the issuer’s counsel will diligence the syndicate’s compliance posture as part of the deal.
HSR antitrust filings. A buyer-side syndicate member acquiring above the Hart-Scott-Rodino threshold (revised annually to $126.4 million in 2026 per the FTC’s HSR thresholds page) must file premerger notification, even for a minority position. This rarely bites individual employee tenders but does bite large anchor commitments at unicorns valued above $5 billion.
The Wellman v Dickinson 8-factor test: when is a buyback a “tender offer”?
Reg 14E only applies if the buyback rises to the level of a “tender offer,” and the Exchange Act does not define that term. The controlling test is from Wellman v Dickinson, 475 F. Supp. 783 (S.D.N.Y. 1979), affirmed on other grounds at 682 F.2d 355 (2d Cir. 1982). The Second Circuit revisited the same standard in Hanson Trust PLC v SCM Corp., 774 F.2d 47 (2d Cir. 1985) and treated the eight factors as a flexible totality test rather than a checklist.
The eight factors are below. A private buyback that hits five or more is almost certainly a “tender offer” requiring Reg 14E compliance.
| # | Factor | How it presents in a private tender |
|---|---|---|
| 1 | Active and widespread solicitation of public holders | Email to all eligible employees + portal launched on Carta or Shareworks counts |
| 2 | Solicitation for a substantial percentage of the issuer’s stock | Even 5% of common float counts; most tenders target 5-20% |
| 3 | Offer at a premium over the prevailing market price | Tender price typically 20-50% over 409A common fair-market value |
| 4 | Terms of the offer are firm rather than negotiable | Single clearing price, no individual negotiation |
| 5 | Offer contingent on the tender of a fixed minimum number of shares, often subject to a fixed maximum | Most tenders set both a floor (minimum for the buyer-side syndicate) and a ceiling (maximum per holder + aggregate) |
| 6 | Offer open only for a limited period of time | 20-business-day standard window |
| 7 | Offerees subjected to pressure to sell their stock | The use-it-or-lose-it framing of a one-time liquidity event creates pressure |
| 8 | Public announcement of a purchasing program followed by rapid accumulation of large amounts of the issuer’s securities | Tender announcement plus 20-day accumulation window |
A board-sponsored employee tender hits all eight factors in almost every case, which is why practitioners assume Reg 14E applies. The only meaningful debate is around private repurchase programs targeting a small number of specific holders (a founder secondary, for example, structured as a direct buyback from one or two individuals), which can avoid factors 1, 2, and 7 and therefore avoid 14E. See Morrison Foerster’s private tender offer guide for the cleaner walk-through.
Mechanics: how a private tender actually runs
The mechanics break into eight stages, running roughly 60 to 90 days from board approval to closing. The lead law firms running these (Cooley, Wilson Sonsini, Gunderson, Fenwick, Latham, and Kirkland) all use a similar playbook.
Stage 1: Board approval and 409A refresh (week 1-2). The board passes resolutions approving the tender, setting a maximum aggregate dollar size, authorizing the lead investor to organize the syndicate, and engaging counsel and tender administrator. A 409A refresh is commissioned because the auditors will want fresh common-stock fair-market-value support as the reference point. AICPA practice aids govern the 409A methodology.
Stage 2: Determine eligibility (week 2-3). The eligibility design is the most-debated piece. Typical defaults: current employees only or current plus former employees within a two-year window, two-year tenure cliff at issuer, vested shares only, with founders and executive officers excluded or capped. Investors (Series A, B, C holders) are often included as a separate eligibility bucket.
Stage 3: Set price (week 3-4). The tender price is negotiated between the issuer board and the lead buyer. The negotiation reference points: the most recent preferred-equity round price, the just-refreshed 409A common fair-market value, the Discount for Lack of Marketability (DLOM) applied between preferred and common (typically 20% to 40%), and the secondary-marketplace prints from Hiive and Forge. The clearing price typically lands at 20% to 50% over 409A common.
Stage 4: Source buyer-side syndicate (week 3-6). See section 9 below. The lead investor (often an existing later-stage holder) commits an anchor allocation, then invites co-investors. Sequoia’s continuation vehicle approach has become a template here, as has the GP-led secondary structure used by Industry Ventures, StepStone Group, Lexington Partners, and Hamilton Lane.
Stage 5: Disclosure document (week 4-6). The “Offer to Purchase” runs 40 to 80 pages and is functionally similar to a public Schedule TO. It covers: the tender terms, eligibility, price, payment mechanics, the issuer’s recent financials, risk factors, tax disclosure, and the buyer-side syndicate identities. It is reviewed by counsel for 14E anti-fraud sufficiency and 506(b)/4(a)(7) disclosure adequacy. Fenwick & West’s private tender memos are a frequent template source.
Stage 6: 20-business-day open window (week 7-10). The tender is launched. Holders log into the tender administrator’s portal (Carta, Shareworks by Morgan Stanley, AST Equity Plan Solutions) and elect how many shares to tender. Withdrawal rights run throughout the window. The issuer’s “subject company recommendation” under Rule 14e-2 is built into the Offer to Purchase package.
Stage 7: Closing and cap-table update (week 10-11). If the floor minimum is met, the tender closes. If subscription exceeds the ceiling, pro-rata allocation applies (typically pro rata across each tenderer’s election relative to total elected). Cash is wired to selling holders net of withholding. Cap-table is updated via Carta, Pulley, or Shareworks.
Stage 8: 409A reset post-tender (week 11-12). The tender print is a “transaction in the issuer’s securities” that the next 409A valuation must reflect. Most issuers commission a fresh 409A immediately post-close. The reset price typically lands between the prior 409A and the tender price, depending on the DLOM analysis and the volume tendered.
Eligibility rules: who gets to sell
The eligibility design is what makes a tender feel fair to employees and what protects the cap-table from over-monetization by any one holder. Six common eligibility levers:
1. Tenure-cliff at issuer. A two-year cliff is the most common. Employees who joined in the prior two years are excluded entirely. Some issuers run a four-year cliff if the goal is to reward only long-tenured staff. Stripe and Databricks have both used variants of this in recent rounds.
2. Vested-only. Universal. Unvested shares cannot be tendered because the holder does not own them yet.
3. Current vs former employees. Roughly 60% of tenders include former employees within a defined window (typically two years post-departure), and 40% restrict to current employees only. Including former employees increases program goodwill but adds eligibility-verification complexity.
4. Percentage sell-cap per holder. A holder cap, typically 10% to 25% of vested holdings, prevents any one employee from cashing out entirely. A 25% cap is the most common middle ground. Some programs scale the cap inversely with tenure (longer-tenured employees can sell a higher percentage).
5. Strategic-holdings exclusions. Founders, board members, Section 16 officers (if planning IPO within 12 months), and other strategic holders are often excluded entirely or capped severely. The board-level optics of a founder selling are different from an engineer selling.
6. Regulatory holds. If the issuer is planning an IPO within 12 months, certain holders may be in a pre-IPO quiet period that constrains their ability to sell. Section 5 of the Securities Act issues come up in this analysis.
The combined effect of these rules is that a typical tender lets a long-tenured Series B-era employee sell 20% to 25% of vested holdings, lets a Series D-era engineer with two years tenure sell perhaps 10% to 15%, and prevents either from cashing out fully.
Eligibility communication. Employees consistently rate “fairness of eligibility rules” as the single most important driver of tender satisfaction in Carta’s tender survey data. The board should publish the eligibility logic at the same time it announces the tender. Surprise eligibility exclusions discovered when an employee tries to log into the tender portal are the most common operational failure point and the most common source of employee-relations damage. Gunderson Dettmer’s Catalyze playbook walks through the communication-cadence best practices in detail.
Pricing methodology and the 409A relationship
The tender price has three reference points: the most recent preferred round, the current 409A common, and the secondary-marketplace prints. The math of how they interrelate is where many sellers (and some founders) get confused.
Preferred vs common. Preferred stock typically carries a liquidation preference, dividend rights, anti-dilution protection, and other features that make a share of preferred worth more than a share of common. The Discount for Lack of Marketability captures the spread between preferred and common, and 409A valuation methodologies (Option Pricing Method, Probability-Weighted Expected Return Method, Hybrid Method) all model this discount. Per AICPA practice aids, DLOMs at late-stage unicorns commonly run 20% to 40%.
Tender price vs 409A common. A clean rule of thumb: tender prices typically clear at 20% to 50% above the most recent 409A common fair-market value. The reasons the tender price exceeds 409A:
- The tender buyer is paying for a guaranteed allocation in a name they could not otherwise accumulate
- The buyer is often treating the common tender shares as preferred-equivalent on the assumption that an IPO converts everything to a single class
- The 409A methodology applies a DLOM that the tender itself starts to argue against (because a tender provides liquidity, which is the thing DLOM was discounting for)
- The buyer pays a slight premium for the speed and certainty of the tender mechanism vs piecing together a position on the marketplace
Tender price vs preferred round price. Tenders commonly clear at 50% to 80% of the most recent preferred round price. The OpenAI October 2024 tender, for example, cleared at the implied $157 billion valuation while the contemporaneous Series F preferred was at the same headline figure, but the common tender price was below preferred on a per-share basis because preferred carried liquidation preference. SpaceX’s December 2024 tender, by contrast, cleared at $185 per share, implying $350 billion enterprise value.
Post-tender 409A reset. The tender transaction creates a market-based valuation input that auditors will demand the next 409A reflect. A tender at $50 per share for common, when the prior 409A was $35, will usually push the next 409A to a number between $35 and $50, with the exact placement depending on the percentage of common stock that tendered (more volume = stronger market signal = closer to tender price) and the time elapsed (a 409A more than three months post-tender allows for more interpretive room). The reset matters for the next year of option grants because strike prices reset to the new 409A.
The buyer-side syndicate structure
The buyer side is rarely a single check. Most private tenders are syndicated across four to twelve buyers, structured under one of three legal forms: a special-purpose vehicle that holds the tendered shares, a continuation vehicle for the existing lead investor’s prior fund, or direct ownership by each syndicate member. Six common participant types:
1. Lead investor (existing later-stage holder). The most common lead is an existing growth-equity holder that wants to increase ownership and is willing to commit a $300 million to $2 billion anchor check. Sequoia anchored multiple Stripe tenders in this fashion, and Thrive Capital has anchored at OpenAI.
2. GP-led continuation vehicles. A VC fund whose 2014-vintage Series A position in a unicorn is approaching the end of fund life can roll that position into a continuation vehicle that takes additional tendered shares. The Sequoia Capital Fund structure, announced in October 2021, was an early template for this. Coatue, General Catalyst, and Lightspeed have all used variants.
3. Secondary specialists. Firms whose entire strategy is to acquire late-stage private positions: Industry Ventures, StepStone Group, Lexington Partners, Hamilton Lane, Ardian, and Industry Capital. These firms anchor or co-lead a meaningful share of all private tenders.
4. Sovereign wealth funds. Saudi Public Investment Fund (PIF), Singapore’s GIC and Temasek, Abu Dhabi’s Mubadala and ADIA, and Norway’s Government Pension Fund Global have all anchored private tenders. They prefer $500 million plus check sizes and very-late-stage names. Saudi PIF’s stake-building in SpaceX is the canonical recent example.
5. Corporate venture and strategic buyers. Microsoft, Nvidia, and other strategics have appeared on tender syndicates where the target is a strategic platform. Microsoft has been on multiple OpenAI tender rounds.
6. Insider LPs. Existing limited partners in the lead investor’s fund are sometimes invited to co-invest alongside the fund in the tender. This is structured as either a co-investment vehicle or a direct allocation, depending on the lead investor’s LP agreement.
The syndicate composition matters for the issuer because it determines voting alignment on the cap table after the tender. A tender that consolidates 8% of common stock into one Sequoia continuation vehicle is governance-clean; one that scatters that 8% across twenty small secondary buyers is not.
SPV vs continuation vehicle vs direct ownership. Three legal forms exist for the buyer-side ownership. A special-purpose vehicle (SPV) is created solely to hold the tendered shares, with each syndicate member taking an LP interest. SPVs are simple to set up but stack a layer of management fee and carried interest on top of the underlying position. A continuation vehicle is a new fund created to acquire the lead investor’s existing position plus the tendered shares, with the existing fund’s LPs given the choice to roll into the new vehicle or be cashed out. Continuation vehicles solve the fund-life-end problem for old VC funds and are governed by guidance from the SEC Division of Examinations on conflicts of interest. Direct ownership, where each syndicate member takes the tendered shares onto its own balance sheet, is the cleanest but rarely works for syndicates of more than two or three buyers because of cap-table line proliferation. Kirkland & Ellis and Womble Bond Dickinson both publish recurring practitioner notes on the three-way trade-off.
Recent private tender examples, 2024-2026
The table below lists the largest publicly-reported private tenders since January 2024. All valuations are headline implied enterprise value at tender close. Volume figures are reported aggregate dollar size where disclosed; many tenders do not disclose this.
| Issuer | Tender date | Implied valuation | Reported size | Lead anchor(s) |
|---|---|---|---|---|
| Stripe | Feb 2024 | $65B then $91.5B | $1B | Sequoia, Founders Fund, GIC |
| Stripe | Feb 2026 | $159B | $1B+ | Sequoia, Goldman, Capital Group |
| Databricks | Apr 2025 | $62B | $10B Series J + tender | Thrive, Andreessen Horowitz, DST |
| OpenAI | Oct 2024 | $157B | $1.5B tender | Thrive, Microsoft, Nvidia, Khosla |
| OpenAI | Sep 2025 | $500B+ | $10.3B reported | Thrive, SoftBank, MGX |
| SpaceX | Jun 2024 | $210B | $750M | Sequoia, Founders Fund, ICONIQ |
| SpaceX | Dec 2024 | $350B | $1.25B | Sequoia, Founders Fund, PIF |
| Anthropic | Jan 2025 | $61.5B | $2B | Lightspeed, Google, Salesforce Ventures |
| Canva | 2024 | $26B | $1.6B | ICONIQ, Coatue, Bessemer secondaries |
| Discord | 2024 | $15B | not disclosed | Existing growth holders |
| Plaid | 2025 | $6B | not disclosed | Growth secondaries |
| Notion | 2024-2025 | $10B | not disclosed | Existing investors |
Two patterns are worth noting. First, the largest tenders are clustering around AI-platform names (OpenAI, Anthropic, Databricks) and SpaceX, where employee demand for liquidity is intense and outside-capital demand for allocation is intense. Second, the frequency has moved from one-off events to roughly semi-annual cadence at the highest-valuation names; SpaceX has run a tender every six months for four years, per Bloomberg’s tracking. For ctacquisitions.com readers tracking the most active issuer, see our Stripe tender offer history and the broader what is a tender offer primer.
Tax handling for selling employees
The tax outcome for an employee depends on the share type (ISO, NSO, RSU, or post-exercise common), the holding period, the state of residence, and whether Qualified Small Business Stock (QSBS) treatment applies. The four common cases:
ISO holders (Incentive Stock Options under IRC Section 422). Per 26 USC Section 422, ISOs qualify for long-term capital gains treatment on the full sale-price-minus-strike-price gain if two holding periods are met: (a) two years from grant date, and (b) one year from exercise date. If both met (the “qualifying disposition”), the entire spread is long-term capital gains, federal rate of 0%, 15%, or 20%.
- Exercise-and-hold then tender. Most tax-efficient. Employee exercised more than a year before tender, both holding periods met, full gain is long-term capital gains. Watch the Alternative Minimum Tax (AMT) bite at exercise: the spread between strike and 409A fair-market value at exercise is an AMT preference item under IRC Section 56.
- Exercise-and-sell same year. Disqualifying disposition. The spread at exercise becomes ordinary income, and only the post-exercise appreciation is capital gains. Often the largest tax mistake employees make.
- 83(b) election. Available only for early-exercised ISOs where unvested shares are bought up front. Per IRC Section 83(b), the election locks in the ordinary income at then-fair-market-value (often zero or near-zero at early-stage) and starts the long-term-capital-gains holding period at grant.
NSO holders (Non-Qualified Stock Options). At exercise, the spread between strike and current fair-market value is ordinary income subject to federal income tax, employment tax, and state tax. The issuer withholds at exercise. Post-exercise, any appreciation between exercise and tender sale is capital gains (long-term if held over one year post-exercise, short-term otherwise).
RSU holders (Restricted Stock Units). At vest, the full fair-market value of the vested shares is ordinary income, with federal income tax, employment tax, and state tax. The issuer withholds, typically via “sell-to-cover” or “net settlement.” Post-vest, appreciation from vest-day fair-market value to tender sale price is capital gains. The holding period starts at vest.
QSBS under IRC Section 1202. The most powerful federal exemption in the equity-compensation toolkit. Per 26 USC Section 1202, gains on Qualified Small Business Stock are exempt from federal income tax up to the greater of $10 million or 10x the holder’s basis, if these tests are met:
- Held for more than 5 years before sale
- Issuer was a domestic C-corp at issuance and substantially all years held
- Issuer’s gross assets did not exceed $50 million at any time before or immediately after issuance (the “asset cap test”)
- Issuer was an active business (no real estate, financial services, hospitality, certain professional services)
For employees at Series A/B-stage unicorns who exercised early (before the gross assets test was tripped), QSBS can wipe out federal tax on millions of dollars of tender gains. See our QSBS Section 1202 deep dive.
State tax. California is the punitive case. California does not conform to QSBS, so the federal exemption does not reduce California tax. Employees who tender while CA residents pay full California rates (up to 13.3% plus 1.1% mental-health surcharge for top brackets). Many late-stage employees plan tender timing around establishing non-California domicile, though the FTB’s residency audit lookback under California FTB residency rules is aggressive. New York non-resident issues come up where the income is sourced to NY work performed during the vesting period; consult counsel.
Should I accept the tender? An employee decision framework
The default mistake employees make at their first tender is to do nothing (declining entirely) or to do everything (selling the full eligible amount). Both are usually wrong. The right answer is almost always partial. The decision matrix below maps the most common employee situations to a default recommendation.
| Situation | Recommended action | Reasoning |
|---|---|---|
| Plan to stay at issuer through IPO, tender shares concentrated >50% of net worth | Sell 25-50% of eligible | Diversification; sustain IPO upside on remainder |
| Plan to stay, tender shares 20-50% of net worth | Sell 15-25% of eligible | Modest diversification; preserve upside |
| Plan to stay, tender shares <20% of net worth | Sell 0-15% of eligible | Limited diversification need; lean into upside |
| Planning to leave issuer within 12 months | Sell maximum eligible | Eliminate post-departure illiquidity and exercise-window pressure |
| Major life event (house, divorce, medical, education) | Sell amount needed plus 25% buffer | Convert paper to real for known cash need |
| Strong conviction issuer will 3x+ before IPO | Decline or sell minimum | Illiquidity premium worth capturing; only if conviction is research-grounded |
| ISO holder, exercise-and-sell same year would trigger ordinary income | Sell only what was exercised >1 year ago | Preserve long-term capital gains treatment on remainder |
| Have unexercised NSOs about to expire | Exercise and tender what you can in same window | Avoid expiration; tender provides cash for tax withholding |
Six additional considerations beyond the matrix:
1. Tax-loss harvesting first. Before tendering at a gain, harvest losses elsewhere in your portfolio in the same calendar year. The basic $3,000 ordinary-income offset and unlimited capital-gain offset rules under IRC Section 1211 apply.
2. AMT timing strategy. If you have unexercised ISOs and are planning to exercise this year, model the AMT bite carefully. Exercising in a year you also have a large tender sale can compound AMT. IRS Form 6251 instructions walk through the AMT calculation.
3. 10b5-1 plan considerations for repeat tenders. If the issuer runs annual tenders and you expect to participate in multiple, talk to counsel about a Rule 10b5-1 plan. The plan locks in a participation election ahead of any material non-public information and gives an affirmative defense to insider-trading allegations.
4. QSBS holding-period strategy. If you are close to the 5-year QSBS hold mark, delay tendering until you cross it. The federal-tax savings can be enormous.
5. Tender allocation pro-ration risk. If the tender is oversubscribed (more shares offered than the buyer-side ceiling), your elected amount may be pro-rated down. Election strategy under uncertainty: elect the maximum if you want partial liquidity, knowing pro-ration may cut it.
6. Charitable giving. Donating appreciated tender-eligible shares to a Donor Advised Fund (DAF) before the tender deadline lets you deduct fair-market value and avoid capital gains. The DAF then tenders. Requires advance coordination with the issuer and DAF custodian.
For founders and boards: how to structure a tender
The founder-side and board-side considerations are different from the employee-side. The goal is not to maximize a single employee’s outcome, it is to design a recurring liquidity program that supports retention, signals discipline to future investors, and stays compliant with both Reg 14E and the company’s investor agreements.
Cadence. Annual is the emerging best practice for unicorn-stage companies. SpaceX’s semi-annual cadence is unusual and only works because the company has continuous capital demand. Most companies should run a tender either annually or every 18 months. Ad-hoc one-off tenders signal panic; programmatic tenders signal discipline.
Eligibility design (see section 7). Lean toward inclusion of former employees within a 2-year window, lean toward a 25% sell-cap per holder, exclude executive officers if planning IPO within 12 months, and disclose the eligibility logic in the Offer to Purchase so employees see it as systematic.
Pricing methodology. Target a clearing price that is 25% to 50% premium to current 409A common. Going much higher risks both an IRS 409A challenge and an SEC anti-fraud risk if the disclosure suggests the company believes the tender price reflects fair market value while the 409A says otherwise. Going lower than 25% over 409A makes the tender unattractive to sellers.
Syndicate composition. Bias toward one or two lead anchors plus three to five co-investors, not a long tail of small buyers. A consolidated buyer block is governance-clean; a fragmented buyer block is a cap-table headache at IPO.
Lockup terms. Most private tenders do not impose a post-tender lockup on remaining shares, because the remaining shares are already illiquid. However, if the issuer plans to IPO within 12 months, the tender Offer to Purchase often references the future IPO lockup that will apply.
Disclosure rigor. Treat the Offer to Purchase as if it were an S-1. Auditor-reviewed financials, current cap-table, risk factors, recent material litigation, recent material transactions, and the buyer-side syndicate identities. The DealLawyers.com tender resources are a good check on disclosure thoroughness, as are Davis Polk and Latham & Watkins client memos.
409A coordination. Hire the 409A valuation firm two weeks before tender launch, not after. The pre-tender 409A is the reference; the post-tender 409A is the reset. Both should be defensible audits.
Tax-withholding mechanics. For NSO and RSU holders who exercise or whose shares vest as part of the tender mechanics, the issuer is responsible for withholding. Coordinate with the tender administrator (Carta, Shareworks, AST) on the withholding workflow. Failure here is the most common operational mistake. For broker selection considerations, our M&A advisor guide covers the related sell-side advisor landscape, and our tender offer rules primer covers the public-side analog.
TLDR and seven takeaways
A private company tender offer is the single most important liquidity mechanism for employees and early investors at pre-IPO unicorns. The structure is well-established, the regulatory framework is clear, and the deal precedents from 2024-2026 (Stripe, Databricks, OpenAI, SpaceX, Anthropic) have made the playbook reasonably standardized. Seven takeaways for the decision-stage reader:
- Reg 14E applies, Reg 14D does not. Schedule TO is not required, but Rule 14e-1 timing (20 business days), Rule 14e-2 issuer position statement, and Rule 14e-3 insider-trading rules all apply.
- The Wellman 8-factor test determines if a buyback is a tender. Almost every board-sponsored employee buyback hits all 8 factors, which is why practitioners assume 14E applies.
- Tender price clears 20-50% over 409A common. The post-tender 409A typically resets to a number between the prior 409A and the tender price.
- Eligibility levers control fairness and risk. Two-year tenure cliff, vested-only, 25% sell-cap per holder, current plus recent-former employees, founders excluded or capped.
- The default employee answer is partial. Sell 15% to 50% of eligible, depending on concentration risk and conviction in the issuer.
- QSBS Section 1202 can wipe out federal tax on up to $10 million of gain. If you cross the 5-year hold, delay tendering until you cross it.
- For founders, programmatic beats ad-hoc. Annual cadence signals discipline; one-off tenders signal panic.
If you are reading this because you have a tender election in front of you, the next step is to build the personal tax model with a CPA who has done private-equity work and to read the Offer to Purchase carefully. If you are reading this because you are designing one for your company, the next step is to engage Cooley, Wilson Sonsini, Gunderson, Fenwick, Latham, or Kirkland on the law-firm side and Carta or Shareworks on the administrator side, and to commission the 409A refresh ahead of any other workstream.